WORKWEEK

If I weren’t waging word-based warfare against climate change, perhaps I’d wage one against, well, other words. Particularly against the overuse of abstractions. Whether in words or elsewhere, they can be dangerous. 

What do I mean by an abstraction? Take the name of your friend when it pops up next to a text message on your phone. Within the context of your phone, that person has become an abstraction. Rather than a living, breathing, human being, they’re represented by symbols. 

Why does this matter to media and climate tech? Well, the words we use in business and climate matter a lot, too. Unfortunately, business, in particular, lends itself to abstraction. Sometimes intentional, sometimes not. Regardless, when they metastasize, they do more harm than good. 

Inflation. Supply chain issues. Permitting issues. 

All of these catch-alls are taken as perfectly reasonable explanations for why deploying renewable energy and other climate solutions is slower than desired right now. Say them at the office water cooler, and you sound like you’re in the know. You sound like you’re privy to the climate tech common knowledge. 

The problem is, absent additional detail, abstractions like these tell us nothing about what’s actually going on. “Supply chain issues” is a perfect example. Do you know what that means? I don’t really. Odds are, the person using that phrase doesn’t know exactly what they’re saying either. It’s a perfect stand-in phrase; it sounds like it explains everything without explaining anything at all.

Here’s an example on the topic of onshore wind from this week: 

The sector has faced rising costs, supply chain issues, and government-led growth restrictions. Onshore wind project investments actually declined 8% globally in the first half of 2023, according to Bloomberg New Energy Finance. 

(behind a paywall here)

If you take a step back, are you any wiser about the actual issues facing the wind industry for having read that sentence? I’m not.

I’m not trying to be a dick here, I’ve done the same thing often in my writing. 

But I want to do better because these types of abstractions don’t help anyone make progress on or understand the genuine challenges plaguing wind energy. They make it harder to suss out what’s really going on. We have to move beyond abstraction to understand the root of the challenges.

Beyond abstraction: Headwinds for wind

It’s true. Wind developers, especially offshore wind developers, are struggling with a range of issues (including “supply chain issues”). Storm clouds have formed in the headlines:

• Up to 10 GW of planned capacity in the U.S. is at risk as developers, including Ørsted, Equinor, Engie, and EDP Renewables, clamor for more government support and threaten to abandon projects otherwise. 
• A recent U.K. offshore wind lease auction failed to attract a single bid. 
• A Gulf Coast auction in the U.S. performed similarly poorly recently.
• Ørsted took $2.3B in impairment charges on its U.S. portfolio, citing, wait for it, supply chain issues, other cost overruns, and trouble negotiating tax credits with the U.S. government.

To step back, a much-parroted refrain is that wind and solar power are fundamentally the cheapest way to produce electricity. In some cases, hour to hour, that may be true. 

But let’s take the case of offshore wind for a moment. In the U.K., auction developers balked at bidding on leases because the government-set prices offered for electricity projects would generate were too low. Said differently, with an eye on what it would cost to build new wind farms and generate electricity, developers said the math doesn’t pencil. Does that sound characteristic of a technology that’s fundamentally cheaper than its competitors? 

Moving past the question about what electricity generation technologies are cheapest, it’s worth asking why it’s gotten more expensive to deliver offshore wind energy. Here’s where the abstractions come back in again. With respect to the why, you’ll often read sentences like this:

Offshore wind developers had repeatedly warned the government that they were unlikely to bid in this year’s auction round while they are facing rising financing and supply chain costs. (here)

Last week, Ørsted said it may see U.S. impairments of 16 billion Danish crowns ($2.3 billion) due to supply chain problems, soaring interest rates, and a lack of new tax credits. (here)

Some of the challenges identified here are clear. Higher interest rates can make it more expensive to finance a project. There’s a direct relationship between higher rates on debt used to fund construction and project costs. 

Other identified challenges aren’t inherently clear. We see the pernicious “supply chain problems” and “supply chain costs” crop up in both instances. 

What does “supply chain problems” mean? To get closer to a primary source, we can look at financial reports and disclosures from major wind turbine manufacturers and wind project developers. Here’s what Ørsted noted regarding supply chain challenges’ when it recently announced its $2.3B impairment charges for offshore U.S. wind projects:

The Ocean Wind 1, Sunrise Wind, and Revolution Wind projects are adversely impacted by a handful of supplier delays. Ørsted has concluded that there is a continuously increasing risk in these suppliers’ ability to deliver on their commitments and contracted schedules. This could create knock-on effects requiring future remobilizations to finish installation, as well as potentially delayed revenue, extra costs, and other business case implications…

This is still pretty opaque stuff. To distill it down a bit, though, Ørsted is noting that the suppliers with whom they work are having trouble delivering equipment on time and according to original cost projects. The ‘knock-on’ impact of that is that both the time to deliver on project development and the cost of project development increases. 

To take an example from another sector, climate tech developers everywhere are dealing with a transformer shortage. Lead times for securing new transformers are as long as five years. Shortage also means there’s a mismatch between supply and demand, which increases prices. If you want a transformer faster, you have to pay more. While it’s difficult to identify precisely what components in the offshore wind supply chain are most constrained, I imagine the dynamics look similar to what’s happening with transformers. 

Even more interesting to me is what Ørsted isn’t saying, however. Navigating complex supply chains is the company’s job. It’s what a company like Ørsted is supposed to be uniquely well-positioned to do. It’s what good, sustainable project development requires.

That’s another problem with the abstraction of “supply chain issues.” It shifts responsibility. It makes it seem like it’s the supply chain’s fault.

They might as well blame the wind instead. Except they already do that; slower wind speeds do matter to major wind companies, and, unlike supply chain issues, are truly out of their control. 

I’d rather Ørsted come out and say, “We don’t know how to deliver offshore wind projects right now cost-effectively.” Because that’s the subtext.

Beyond the supply chain

Blaming challenges in wind energy development on the supply chain also distracts from other very real challenges manufacturers and developers are facing. Lost in the discussion of inflation and supply chain issues is the fact that manufacturers and developers alike are being forced to deal with accelerated deterioration of deployed turbines. Arguably, this is equally or even more concerning and certainly much less discussed. 

Here’s a note from a recent Siemens Gamesa (major Spanish turbine manufacturer) report:

The impact of the outcome of the periodic monitoring and technical failure assessment of the installed fleet amounted to c. -€472m in EBIT pre PPA and before integration and restructuring costs. The assessment, which detected a negative trend in specific component failure rates, resulted in higher projected maintenance and warranty expenses than had been estimated previously.

In simpler terms, this says that by assessing the technical health of the “installed fleet,” Siemens Gamesa found that certain components and equipment are failing more frequently and / or quickly than expected. That translates into more maintenance and repairs than anticipated, which means the company has to set aside more money to cover warranties and maintenance costs. To the tune of approximately €472M just for this latest financial period.

If wind energy systems are deteriorating or failing faster than expected, that’s concerning. As the world scales deployment of renewable energy, people model forecast generation and emissions mitigation potential based on an assumed useful life. If those useful life assumptions are overly optimistic, so are our models and assumptions around the ROI of deploying systems in the first place. 

Both onshore and offshore wind capacity additions have been choppy in recent years. 2022 additions lagged 2021 in many markets. Projections that forecast robust capacity additions in coming years should be viewed with skepticism.

It’s always fun to see charts like the one below that forecast robust growth in a technology like offshore wind. We post them on Twitter. We cheer. The problem is, they don’t always come to fruition. Because of ‘supply chain issues.’ Or ‘inflation.’ Or slower wind speeds. Or whatever the real reasons are.

Optimistic projections don’t reduce emissions. Nor do installations inherently. A long, or at least adequate, useful life of operation does.

Finally, it’s also worth noting that companies don’t always back out of projects in good faith. To an extent, given the clean energy goals countries like the U.S. and the U.K. have, developers may be holding regulators hostage a bit. There aren’t that many people to whom the U.S. or U.K. can turn to develop the massive infrastructure needed for offshore wind generation. For instance, in New York, wind developers have petitioned for up to 71% price increases.

Some cost hikes might be ‘real.’ But we shouldn’t discount the possibility that companies aren’t also being somewhat opportunistic here. They will grapple for more free federal support in part because they know they can use the same abstraction tactic we’ve outlined to shift responsibility away from themselves onto ‘market conditions.’ Food for thought. 

The net-net

There are roughly ten core, scalable ways to generate electricity at utility scale. 

• Three are fossil fuel-fired: Coal, natural gas, and oil (Oil is already much less commonly used in electricity generation; it’s better suited for transportation.)
• One is clean but non-renewable: Nuclear fission 
• Six are renewable: Hydroelectric, solar, onshore wind, offshore wind, geothermal, and, lastly (and somewhat loosely), I’ll add a catch-all for distributed energy systems that can be coordinated into a combined system (i.e., virtual power plants). 
• Note: I didn’t add batteries or transmission because these basically increase the capacity factor of other assets by moving energy through time and space, respectively. 

The set of technologies that generates a meaningful amount of grid-scale electricity can then be cut down further to eight categories. We can eliminate oil (already less common) and the coordinated distributed energy system bucket (in its infancy). 

Then, of those eight, we really only want to use six if you aim to cut out coal and natural gas to decarbonize. You could even lump onshore and offshore wind together and have five main pillars. Either way, distilled down, you have a five or six-legged decarbonization stool. If you suddenly lose one of your legs (offshore wind or wind, more generally), things get wobbly. 

The question becomes how transitory the challenges facing the wind industry are. Is this a 3-5 year setback? Or is offshore wind mired for longer? 

And even a 3-5 year slowdown is quite costly. As a society, we’re already not making sufficiently quick progress on decarbonization. This is true of both onshore and offshore wind capacity additions, specifically, as notes Siemens Gamesa in a recent financial report:

If offshore wind is ‘out,’ even just for a few years, it places even more pressure on the other legs of the stool. And if offshore wind doesn’t scale this decade, it might not get another chance. 

I don’t personally care which set of technologies ultimately yields a carbon-free power sector. But companies like Ørsted sure do. I’d like to see them take more responsibility for figuring it out. These dynamics also matter a great deal to how the world as a whole allocates capital to reduce emissions. It’s about more than “supply chain issues.”